News of Note
Eyeball Networks – Federal Court of Appeal finds that a shareholder whose shares have been redeemed has provided valuable consideration therefor by surrendering its shares
Email this ContentPursuant to a conventional s. 55(3)(a) spin-off transaction, a company (“Oldco”) spun off one of its two businesses to a “Newco,” also owned by its sole individual shareholder. The spin-off was completed in the usual manner with a cross-redemption of shares between Oldco and Newco for notes, which then were set off.
The Tax Court had found that s. 160 applied on the basis that the $30M note that Oldco issued on the redemption of its shares held by Newco was valueless. This view was rejected by Noël CJ. True, at that point Oldco had divested itself of its most valuable business assets – but it held in lieu thereof Newco preferred shares to be redeemed for a $30M note owing to it by Newco, which had those assets.
The Crown itself made what might seem like the opposite argument, namely, that on the redemption by Oldco of its preferred shares held by Newco for a $30 million note, “no consideration was effectively given to Oldco in return.” (para. 65). Noël CJ stated that there indeed was consideration going the other way in the form of “Newco in turn … surrender[ing] the shares which had a corresponding $30 million value in its hands.”
The Crown also made a further argument that likely started with the insight that the same spin-off could have been accomplished (albeit, with less tax efficiency) simply by having Oldco drop the business into a Newco subsidiary and then distribute Newco as a dividend in kind – so as to clearly engage s. 160. In rejecting the Crown’s submission that the determination as to whether full consideration had been paid by Newco should be determined by the “overall result” produced by the series of transactions, Noël CJ stated that “the adequacy of the consideration given must be measured against the value of the property transferred by way of a ‘snapshot’ taken at the point in time when the transfer takes place.”
There also were pleasant-sounding dicta, including that a price adjustment clause eliminated any possible value discrepancy between the FMV of the transferred property and the consideration therefor, and that the concept of a series of transactions “only applies when one (or more) of the transactions within the series is primarily tax driven.”
Neal Armstrong. Summary of Eyeball Networks Inc. v. Canada, 2021 FCA 17 under s. 160(1), s. 248(10) and General Concepts – Effective Date.
We have translated 6 more CRA Interpretations
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretation released in May and April, 2009. Their descriptors and links appear below.
These are additions to our set of 1,380 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 3/4 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. You are currently in the “open” week for February.
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2021-01-27 | 22 June 2020 External T.I. 2020-0848721E5 F - SSUC - Entité déterminée et institution publique | Income Tax Act - Section 149 - Subsection 149(1.1) | example of application of s. 149(1.1) |
| 2009-05-08 | 5 May 2009 Internal T.I. 2009-0311211I7 F - Impôt payable par ailleurs en vertu de la Partie I | Income Tax Act - Section 117 - Subsection 117(1) | "tax otherwise payable under this Part" under s. 127(1) includes corporate surtax |
| 2009-05-01 | 23 April 2009 External T.I. 2008-0301241E5 F - Fiducie d'invest. à participation unitaire-75(2) | Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(h) - Subparagraph 53(2)(h)(i.1) | CRA could extend IT-369R, para. 10 to avoid ACB reductions to unit trust units where s. 75(2) applies |
| Income Tax Act - Section 248 - Subsection 248(28) | doubtful that s. 248(28)(a) can be applied to preclude ACB grind | ||
| Income Tax Act - Section 75 - Subsection 75(2) | s. 75(2) generally not applied to commercial unit trust where single class of units subscribed for on FMV terms | ||
| 22 April 2009 Internal T.I. 2009-0312261I7 F - Étude de faisabilité | Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Improvements v. Repairs or Running Expense | expenses of optimizing manufacturing operations including of related shelving and other equipment purchases were on income account | |
| 2009-04-24 | 16 April 2009 External T.I. 2008-0294631E5 F - Interaction between 55(2) and 186(1) | Income Tax Act - Section 55 - Subsection 55(2) | application of s. 55(2) does not affect amount of assessable dividend for Pt. IV tax purposes |
| 25 March 2009 External T.I. 2008-0300401E5 F - Fiducie en faveur de soi-même - prêt sans intérêt | Income Tax Act - Section 75 - Subsection 75(2) | Howson applied to find that non-interest bearing loan by individual to his alter ego trust not subject to s. 75(2)/no contribution if individual pays trust taxes following a s. 104(13.1) election | |
| Income Tax Act - 101-110 - Section 104 - Subsection 104(13.1) | s. 104(13.1) election generally available where no s. 75(2) application, which is not engaged by the individual’s payment of trust-level taxes | ||
| Income Tax Act - Section 56 - Subsection 56(4.1) | s. 56(4.1) inapplicable to NIB loan made by individual to his alter ego trust | ||
| General Concepts - Payment & Receipt | individual pays trust taxes when he receives trust distributions net of such taxes |
Prairies Tubulars – Federal Court finds that requiring payment of duties before they could be appealed was not unconstitutional
Prairies Tubulars challenged the constitutionality of provisions of the Special Import Measures Act (the “Appeal Payment Provisions”) which required it to pay all outstanding duties before proceeding with the SIMA’s appeal procedure. It relied inter alia on Trial Lawyers, 2014 SCC 59, holding that court hearing fees violated s. 96 of the Constitution Act, 1867 where, absent adequate exemptions, they were so high so as to subject “litigants to undue hardship, thereby effectively preventing access to the courts”, and Uber Technologies, 2020 SCC 16, finding that an arbitration clause (requiring the driver to pay a $14,500 USD administration fee and to attend arbitration in the Netherlands) was contrary to the rule of law and public policy because it effectively denied the driver access to the dispute resolution process.
Before dismissing the application, Ahmed J stated:
[L]egislation may be inconsistent with section 96 … if it creates financial obstacles that impose undue hardship on potential litigants … . However, in light of the Applicant’s gross earnings … I am not persuaded … that the Appeal Payment Provisions cause it undue hardship.
… Trial Lawyers is distinguishable … because the Appeal Payment Provisions are remedial, not punitive. Anti-dumping duties are not costs that increase with the length of an appeal, but are rather proportionate to the margin of dumping and returnable to the importer if they are ultimately successful upon redetermination or appeal.
Neal Armstrong. Summary of Prairies Tubulars (2015) Inc. v. Canada (Border Services Agency), 2021 FC 36 under Constitution Act, 1867, s. 96.
CRA indicates that payments to compensate for a break in pensionable services are treated as payments from an unregistered pension plan
A collective bargaining agreement provided that where a retired employee had a break in service due to a workplace injury, that retiree would receive the additional pension benefits that would have been provided to that individual under the employer’s registered pension plan had there been such pensionable service under the plan during the break.
CRA characterized such payments as being made from an unregistered plan (so that they would be ineligible for pension income splitting under s. 60.03 or the pension credit under s. 118(3)), but as includible in the retiree’s income under s. 56(1)(a)(i).
Neal Armstrong. Summary of 22 December 2020 External T.I. 2020-0849291E5 under s. 56(1)(a)(i).
DRI Healthcare Trust is expecting to make significant annual dry income distributions of its pharmaceutical royalty income
DRI Healthcare Trust, which will be a mutual fund trust trading on the TSX, will establish a wholly-owned Irish subsidiary to acquire a portfolios of pharmaceutical royalties, either directly or through purchasing the LP units and general partner of Delaware partnerships holding such royalties. It expects to make cash distributions that are significantly lower than its income (which will be mostly in the form of FAPI) and will distribute the resulting “dry income” through making additional unit issuances, which will then be promptly consolidated to get back to the initial number of units. Given the offshore situs of its assets, it will not be subject to SIFT tax.
The Treaty between Ireland and the U.S. (where most of the royalties may be sourced) is expected to reduce the U.S. withholding tax rate on such royalties to nil. The PFIC rules will apply.
Neal Armstrong. Summary of 25 Janaury 2021 DRI Healthcare Trust preliminary base prep prospectus under Offerings – REIT, Trust and LP Offerings – Foreign Asset Income Funds and LPs.
CRA states that the will-directed formation by a GRE of a charitable remainder trust cannot benefit the deceased’s terminal return under s. 118.1(5.1)(b)
S. 118.1(5.1)(b), when read together with the s. 118.1(1) - “total charitable gifts” – (c)(i)(C) definition, generally indicates that a gift by a graduated rate estate made within 5 years of the deceased’s death can be deemed to be a gift made by the deceased if the gift was of (i) property that was acquired by the GRE on and as a consequence of the death or (ii) property that is substituted for that property
Suppose that the terms of a charitable remainder trust (“CRT”), created by the will of the deceased taxpayer to hold property of the deceased received by the GRE, provide for all the income earned by the CRT to be paid to the surviving spouse and, on the death of that spouse, for the property to be transferred to a qualified donee. Will s. 118.1(5.1)(b) apply to the gift of the equitable interest in such testamentary trust on the basis that such interest is property that is substituted for the remainder interest in the property owned at the time of death that is received by the GRE on and as a consequence of the death of the individual?
CRA essentially indicated that this question was assuming a form of transaction at a variance with what CRA saw. It responded:
[T]he equitable interest in the CRT is created as a result of the transfer of property to the CRT by the GRE. The gift of the equitable interest in the CRT is considered to have been made to the qualified donee when the property is transferred to the CRT, provided that the equitable interest in the CRT vests with the qualified donee at that time (and all other requirements are met).
Since the equitable interest of the donee arose at the moment of the creation of the trust, CRA did not construe there to be a gift of substituted property by the GRE (or of the remainder interest itself) – so that s. 118.1(5.1)(b) did not apply.
Neal Armstrong. Summary of 2 December 2020 External T.I. 2017-0734261E5 under s. 118.1(5.1)(b).
Income Tax Severed Letters 27 January 2021
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CIBC – Federal Court of Appeal finds that VISA provided a GST/HST-exempt financial service to CIBC
CIBC issued Visa credit cards and utilized the Visa payment system, for which it paid fees to VISA. It was acknowledged that such charges otherwise came within the exempt financial services definition, relevantly described as including “the services of paying money (paragraph (a)), arranging for the payment of money (paragraph (l)), and any service provided under an agreement relating to payments of amounts for which a credit card voucher or charge card voucher has been issued (paragraph (i)),” and the only issue was whether the exemption was ousted by the services being of an “administrative” nature.
In finding that this exclusion did not apply, Laskin JA emphasized factual findings by the Tax Court that:
Visa’s services “form an essential part of the ability for CIBC to offer credit card based services to their clients," … they "[give] CIBC customers the ability to purchase goods and services anywhere in the world without CIBC having to individually contact each merchant to set up payment arrangements with them," and that "[i]f CIBC was forced to create such a payment network on its own, even if technically feasible, this network would invariably be much less widely accepted than the one offered by Visa." (para. 63)
He added:
Visa’s services relieve CIBC and other issuers of the need to investigate and analyze the risk profile and solvency of the merchants that accept credit cards in payment for goods and services. To describe the benefit that CIBC obtained from Visa’s services … as "quintessentially administrative," [as was done by the Tax Court] does not … adequately recognize the reality of the benefit that CIBC derived. (para. 63)
Neal Armstrong. Summary of Canadian Imperial Bank of Commerce v. Canada, 2021 FCA 10 under Financial Services (GST/ HST) Regulations – s. 4(2)(b).
Stonehouse Group – Ontario Court of Appeal considers “the principle that governments have the right to legislate illogically” to be “not … persuasive”
As a result of being reassessed to deny the carryback of a loss, the taxpayer was required to pay the reassessed taxes – but, following success in its objection, later was refunded the tax. The logical application of an interpretation of a Corporations Tax Act (Ontario) provision advanced by the Ontario Ministry of Finance would have been to deny any interest to the taxpayer on this refund.
After noting that the provision could also potentially be interpreted more narrowly so as to avoid this result, and before finding for the taxpayer, Nordheimer JA stated:
[T]he respondent’s reliance on the principle that governments have the right to legislate illogically is not a persuasive one. It is also not a principle of statutory interpretation to be readily invoked. …
The language in s. 79(7) is not unambiguous when read in its entire context. While it is not necessary to resort to it in this case … there remains “a residual presumption in favour of the taxpayer” … . Given the history of the legislative provisions regarding the payment of interest, an interpretation which favours the underlying policy choice of fairness to the taxpayer is to be preferred.
Neal Armstrong. Summary of Stonehouse Group Inc. v. Ontario (Finance), 2021 ONCA 10 under Corporations Tax Act. s. 79(7).
We have translated 6 more CRA Interpretations
We have published a translation of a CRA interpretation released last week and a further 5 translations of CRA interpretation released in May 2009. Their descriptors and links appear below.
These are additions to our set of 1,374 full-text translations of French-language Roundtable items and Technical Interpretations of the Income Tax Rulings Directorate, which covers all of the last 11 2/3 years of releases of Interpretations by the Directorate. These translations are subject to the usual (3 working weeks per month) paywall. Next week is the “open” week for February.